The Bank of Greece and the ECB announced that they will raise their key interest rate to combat inflation. When natural gas prices rise, when fertilizer prices skyrocket, and when geopolitical crises drive up energy costs, the European Central Bank responds almost automatically: it raises interest rates. This choice is presented as a necessary defense against inflation. The question, however, is whether this is a cure or a misdiagnosis.
Raising interest rates makes sense when inflation stems from excessive demand, excessive borrowing, and excessive liquidity. But when price hikes are caused by more expensive energy, raw materials, disrupted supply chains, and geopolitical tensions, the problem lies on the supply side. And there, interest rates do not address the root cause.
Raising interest rates does not lower the price of natural gas, does not increase oil production, and does not make fertilizers cheaper. It simply curbs demand. In other words, it does not reduce production costs. It reduces economic activity so that it can adjust to those costs.
The consequences are clear. Businesses that invest and create jobs see their financing costs rise. Households with mortgages and business loans are burdened. In contrast, the financial sector often benefits from wider interest rate margins.
The problem is even more acute for small and medium-sized enterprises, which depend on bank lending. Large conglomerates have access to capital markets, strong balance sheets, and liquidity reserves. The smaller ones—that is, over 90%—do not. Thus, a policy that is supposed to protect the economy often strengthens the powerful, both Greek and foreign, and weakens the most vulnerable.
For countries like Greece, with high public and private debt, this choice is even more painful. It increases the cost of government financing, restricts investment, and reduces the scope for economic policy. In a monetary union with such diverse economies, the same recipe does not produce the same results.
The example of the 2022–2024 period is revealing. The ECB implemented the largest interest rate hike in the history of the euro, and inflation subsided. During the same period, however, natural gas prices collapsed, energy sources diversified, and extensive government interventions were implemented. Which factor was ultimately decisive?
The deeper problem lies elsewhere. Europe continues to address strategic weaknesses with monetary tools. Instead of investing decisively in energy security, the production of critical inputs, and the creation of large strategic reserves, it chooses to curb demand when a crisis arises.
The real failure is not the rise in interest rates. It is that, half a century after the oil crises and a few years after the greatest energy upheaval in modern Europe, the continent remains vulnerable to the same shocks. Cost inflation is not addressed with more expensive money but with greater resilience. Europe is trying to treat even the symptoms with the wrong prescriptions, avoiding addressing the disease.
Neoliberalism works well when everything is going smoothly. When crises erupt, its inability to address problems of strategic importance is revealed. The era of energy insecurity, geopolitical conflicts, and food uncertainty does not call for less government.
It needs a serious, strong, effective state with a plan and a strategic vision.
* Michalis Sallas is chairman of the Lyktos Group, honorary chairman of Piraeus Bank, and a former university professor. This article was first published in To Vima on Sunday.